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Question (2) [10 marks] An investor with utility U(x) = 0.0003x-8.4e-x/2775, where x is total wealth, has a choice between two alternatives: A: Win $10,000
Question (2) [10 marks] An investor with utility U(x) = 0.0003x-8.4e-x/2775, where x is total wealth, has a choice between two alternatives: A: Win $10,000 with probability 0.2 and win $1,000 with probability 0.8. B: Win $3,000 with probability 0.9 and lose $2,000 with probability 0.1. 1. If the investor currently has $2,500, should he choose A or B? 2. If the investor currently has $10,000, should he choose A or B? 3. Calculate risk premiums (RP) (for parts 1 & 2) and what is your conclusion based on the pattern of RP?
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